Q1 2022 Perrigo Company PLC Earnings Call
[music].
Good day and welcome to the paragraph first quarter 2022 financial results conference call.
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I would now like to turn the conference over to Bradley Joseph V. P of Investor Relations. Please go ahead.
Okay.
Thank you good morning, and welcome to pair it goes first quarter 2022 earnings conference call I Hope you all had a chance to review the earnings press release, we issued this morning.
A copy of the earnings release and presentation for today's discussion are available in the investors section of the Paragon Dotcom website.
Joining today's call are president and CEO , Murray Kessler, and CFO Ray Silcock.
I would like to remind everyone that during this call participants will make certain forward looking statements. Please refer to the important information for shareholders and investors and Safe Harbor language regarding these statements in our press release issued earlier this morning.
A few quick items before we start <unk>.
Unless otherwise stated all financial results discussed and presented on a continuing operations basis. They do not include any contributions from the divested Rx business, which was accounted for as a discontinued operation prior to itself.
In addition to other non-GAAP adjustments as described in the <unk> adjusted profit measures, including adjusted EPS and adjusted operating income exclude from the prior year period certain costs incurred to support the operations of the Rx business, which were reported in continuing operations.
The appendix for additional details and reconciliations of all non-GAAP financial measures presented.
Organic growth excludes acquisitions divestitures and currency in both comparable periods and third Murray's discussion will focus solely on non-GAAP results.
With that I'm pleased to turn the call over to Murray.
Thank you Brad and good morning, everyone.
With our three year transformation to a consumer self care company now complete.
Moving into a new phase, which we're calling optimizing and accelerating.
The pair ago team is hyper focused on optimizing and accelerating our self care platform through one supply chain reinvention.
Improved efficiency productivity and customer service.
Two successful integration of our scale HRA pharma acquisition added three gross margin recovery via pricing and portfolio consolidation.
I will also note that this will be accomplished as we also continually strengthen our organization and culture and contribute to the world, We live by making our products and facilities more sustainable.
With that in mind I'd like to share a few words on an additional announcement we issued this morning.
First I'd like to thank Todd Kingma, our general counsel for the last 19 years, who just announced his retirement.
And Ray Silcock, who I've worked with on and off for the last 30 years and who previously announced his retirement.
Incredible contribution so the company and our self care transformation.
Well they will be missed I'm very excited to share who will be selling their roles.
First Kyle Hanson has been higher.
From Wolverine worldwide and will serve as our EVP General counsel and corporate Secretary.
Second Eduardo Bezerra, most recently from fresh del Monte produce has been hired as EVP and Chief Financial Officer.
They represent the next generation of pair ago leaders, who will help drive the newly transformed Purgo organization.
They both have the passion and season relevant experience that nobody is the perrigo advantage and I'm confident that their diverse perspectives and deep experience will make valuable and immediate contribution.
The Paragon success.
Turning to HRA.
I'm also pleased to say that we close the HRA acquisition nearly two months ahead of schedule.
And are extremely excited to welcome their team in the pair ago family.
Final purchase price was approximately $1 $9 billion, nearly 200 million lower than originally anticipated tracing to the recent strength of the U S. Dollar a good outcome for shareholders.
More importantly, the company we bought is performing beautifully.
<unk> results for 2021 were stellar.
This is a business that is growing rapidly, finishing up 26% in 2021 versus a year ago and achieved a robust gross margin north of 70%.
HR a strong growth continued in the first quarter of 2022 with net sales up versus year ago on top of double digit growth versus the prior year.
EBITDA was up an impressive 77% versus year ago in the first quarter.
Strong top line growth strong margins and a number of budgeted expense decreases including one time investments included in 2021 operating income that are not expected to repeat in 2022.
Ports are estimates of HRA, achieving approximately 90 million euros in operating profit in 2022.
Since we closed the acquisition early and HRA earnings are historically much stronger in the second half due mainly to the seasonality Outcompete Paragon is expecting operating income accretion of around 55 to 65 million euros in 2022.
Beyond 2022, HRA business growth is expected to continue through geographic expansion and new product adjacencies that along with cost synergies from the deal that are now estimated at 40 million euros versus our original 30 million estimate leads us to reiterate our expectations for <unk>.
You are right at about 150 million euros in operating income in 2023 and that excludes any potential short term impacts associated with capturing the synergies.
Turning to slide 11 first quarter results for pair ago were generally in line with our expectations. Despite another wave of cost headwinds, resulting from the war in Ukraine.
Net sales increased 6% versus a year ago with organic net sales up a very strong 10%.
We attribute this strength to weight global rebound in cough cold and U S nutrition infant formula sales.
<unk> also had a positive impact.
Gross profit margin was down 140 basis points sequentially versus Q4 due to onetime items, we don't expect to repeat.
No additional cost pressure was offset by price increases and higher volume in the quarter, resulting in our EPS, finishing at 33 per diluted share in line with our expectations.
Let's see neutral EPS for the quarter was 37.
Including a <unk> <unk> per share negative impact from the war in Ukraine.
Well pair it goes top line continue to accelerate sequentially. What is more important is that our net sales in Q1 'twenty two are substantially higher than they were back in 2019 before the ups and downs of Coke.
On a three year basis, our first quarter net sales compound annual growth rate is plus five 6% and our organic growth rate kind of on a compounded basis is two 9%.
There can be no doubt that the transformation has returned paragon to revenue growth.
Looking at our categories in more detail strong total net sales growth was driven by strong performance.
Cross both C. S P a and C. S C I with cough cold and contract pack sales, leading the way.
Infant Formula was also a big driver in the USA.
Strong shipments are aligned with robust global consumer demand for self care products.
After two years of disconnects between shipments and consumption.
System appears to be back in balance.
I think it's worth spending a minute on infant formula. This business has turned around nicely topline growth in our nutrition business was up 38% in the quarter driven by infant formula.
Potently pair ago gained more than five share points compared to a year ago.
These gains came from the launch of new Hypoallergenic formula offerings.
<unk> growth in our organic products.
The roll off of Covid enhanced benefit programs for Formula.
Our business also benefited slightly at quarter end from the recall of our competitors' infant formula.
While this didnt benefit us in the quarter much we are now seeing higher demand.
And pair ago is doing everything it can to run as much infant formula as possible.
Help fill the shortages created by the recall.
Also during the quarter I'm proud to say the pair ago team received U S food and drug administration approval for over the counter Nathan the company's first ever branded Rx to OTC switch.
The NDA was that first cycle approval and we expect that.
We expect the brand to be on shelves at leading retailers in the U S. This fall a big win for the pair ago regulatory team.
Turning back to gross margin for the corner.
We are laser focused on recapturing the market margin loss due to supply chain disruptions and cost and freight inflation.
And we still see a clear path to gross margin expansion in the second half of the year.
<unk> with the phasing discussed on our last earnings call.
Manufacturing productivity elimination of onetime costs.
Price increases and no 90% of expected benefits from price. This year are still to come.
Sale of the Latin American businesses and now. The addition of 70% gross margin HRA products should allow us to recover 400 to 500 basis points of gross margin by year end.
Now onto guidance.
We are increasing our organic net sales growth guidance to 8% to 9% compared to prior year up from 7% to 8% driven by expected strong performance for the rest of the year, partially offset by a half a percentage point from expected loss business in Europe .
Crane and Russia.
We are also increasing our all in net sales guidance to growth of eight 5% to nine 5% up from 3.5% to four 5% versus the prior year.
Primary driver is the addition of HRA, which is expected to contribute approximately five five percentage points of growth for this year. This will be partially offset by the impact of unfavorable foreign exchange.
We are also increasing our full year adjusted diluted EPS guidance to $2 30 to $2 40 per share.
This range includes approximately 35 cents accretion from HRA and.
And a <unk> 20 headwind stemming from Russia, Ukraine related macro volatility, which led to unfavorable foreign exchange and higher than anticipated refinancing costs.
Putting the year together, we are now expecting outsized growth on both the top and bottom line with near double digit topline growth and approximately 14% diluted EPS growth.
Yes.
In closing.
Our focus going forward is to optimize and accelerate the business. There are supply chain reinvention through successful integration of HRA and through gross margin enhancement.
And by continually improving our organization and culture.
We are focused on controlling what we can in what remains a very dynamic environment.
We have inflation related pricing actions in place to cover rising costs and.
And expect them to fully take hold in the second half of this year.
We are also uniquely positioned.
In the U S consumer self care market to benefit from an inflationary cycle.
As evidenced by store brand share gains during the last recession.
And with that I will turn the call over to Ray one last time.
To discuss the financials in more detail right.
Thank you Murray good morning, everyone and yes. This is my last earnings.
Earnings call, so I'm going to be retiring from the company. It has been a privilege to work with the talented <unk> team over the past three plus years and I am excited about the flow path ahead for the company.
Currently I'm working diligently to ensure a timely and smooth transition to Eduardo who with his deep experience will be a great new CFO for perrigo.
Now, let's review, our first quarter financials.
On a consolidated basis, the company reported a GAAP loss from continuing operations of $1 million for the first quarter of 2022.
Loss of one cent per diluted share.
On an adjusted basis consolidated net income from continuing operations was $45 million.
And adjusted diluted EPS from continuing operations was <unk>.
<unk> <unk> per share versus <unk> 50 per share in Q1 last year.
The decline in adjusted EPS as compared to prior year was primarily due to one time headwinds in CSD.
These included higher customer service claims related to unfulfilled customer orders and lower profitability on contract manufactured product, but then now diversity the Rx business we.
We also had higher planned advertising and promotional expenses in CSD I.
In support of our strong top line growth there.
And as Marvin noted the inflation impacts in cost of goods sold and transportation costs were offset by increased sales volumes and higher prices.
Also unfavorable.
Foreign currency movements Hajj adjusted EPS by four cents and we experienced an additional two cent and B E. P S impact.
Ross from lost business in Ukraine, and Russia, and half from product donations, we made in Ukraine.
In line with Perrigo corporate charitable philosophy.
Moving on to non-GAAP adjustments in the first quarter pretax non-GAAP adjustments that totaled $71 million major components included amortization of $49 million H already acquisition and integration fees of 11.4.
A million plus $3 5 million from HR, a purchase price hedge costs.
And impairment charges, writing off a $5 million fixed asset.
Full details of these and other adjustments can be found in the non-GAAP reconciliation table attached to this morning's press release.
The non-GAAP tax adjustments are primarily due to a $13 6 million tax expense related to a pre tax non-GAAP adjustments and the removal of the following reported items $117 2 million tax benefit on dispositions of entities offset by.
Two 6 million dollar tax expense nonrecurring legal entity restructuring.
These led to an adjusted effective tax rate for the quarter of 22, 5% slightly up from the first quarter 2021, adjusted effective tax rate of 22, 2%.
From this point forward in this presentation, all dollar numbers basis points of margin percentages will be on an adjusted continuing operations basis did basis unless stated otherwise.
This is Murray already covered net sales for the quarter, let's move on to gross profit consolidated gross profit in Q1 was $8, 3% lower than prior year, primarily gains or the one time headwinds I, just mentioned, including unfavorable foreign currency movements.
Gross margin declined 540 basis points versus the prior year due primarily to these one time headwinds, which account for nearly half of the decline unfavorable product mix from higher proportion of sales coming from store brand compared to Brian dates and the timing of pricing actions.
They seem to inflation as well as unfavorable foreign currency Consol.
Consolidated operating income for the quarter was $87 million $32 million below Q1 last year, primarily from unfavorable gross profit flow through but also from higher distribution costs and increased advertising and promotion expense.
Which helped us deliver.
<unk> top line growth.
Turning now to the first quarter segment results, let's start with consumer self care Americas C. S. T. A gross profit in the quarter was $178 million $24 million below last year.
Higher sales volumes and positive pricing in the quarter were more than offset by inflation and the cost in cost of goods sold and transportation. In addition in Q1 other cost headwinds, including lower profitability of contract sales to the now divested Rx business customer service claims and some other headwinds.
Total adverse impact of approximately $24 million in combination. These factors led to a year over year gross margin decline of 640 basis points in Q1.
Operating income for Q1 was $87 million.
$3 million down from Q1 last year.
Merrily unfavorable gross profit flow through and increased distribution expenses, partially offset by lower R&D and admin costs. These factors led to a 500 basis point year over year decline in adjusted operating margin.
Moving on to consumer self care International <unk> gross profit was $182 million down $9 million or four 8% from the same quarter last year, largely due to unfavorable currency movements.
Gross margin for the quarter decreased 100 in place 180 basis points, primarily the impact of product mix as we had higher growth in both store brand and contract manufactured products as compared to our higher margin branded offerings.
In addition, we felt the adverse effects of having carried in high cost inventory made in Q4 last year, but expenses in Q1.
Adjusted operating income of $53 million.
$7 million below same quarter prior year, including a 7 million dollar adverse currency effect, excluding currency gross profit was $4, 3% higher than in the same period last year, driven by higher sales volume in the quarter, which came about despite the loss of business as a result of the Russian.
<unk> in Ukraine.
At the operating income line favorable gross profit flow through excluding currency was offset by higher advertising and promotion spend in support of CSPI strong topline growth. These factors led to a 130 basis point year over year decline in adjusted operating margin excluding currency.
Effects.
Yeah.
Moving on now to the balance sheet cash on the balance sheet amounted to $2 billion at the end of the first quarter up from $1 9 billion as at year end 2021.
After the quarter ended we closed on a $2 6 billion dollar refinancing comprising a $1 $6 billion term loan and an undrawn $1 billion revolver.
The term loan was used to refinance an existing term loan maturing in August as well as to refinance to 2023 bonds and to provide approximately $500 million in incremental borrowings over and above what was already available at all of our balance sheet.
On the $1 $9 billion acquisition of HR right together with cash on hand.
Operating cash flow for the quarter was $79 million a strong 176.
Cash conversion on adjusted net income.
As Murray discussed we continue to operate in a dynamic environment, but remain poised for outsized growth given the contribution from the HR right acquisition and continued strong demand for our consumer products, which is reflected in our updated EPS guidance of $2 30 to $2 <unk>.
Sure.
Operator can you open the line for questions. Please.
We will now begin the question answer session.
I'll ask a question you May press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
Okay.
The first question today comes from Chris Schott with Jpmorgan. Please go ahead.
Hey, guys. Good morning, Chris Good morning.
Just a couple of ones for me here I guess first on the gross margin front and it's maybe a couple of different pieces to this I know you touched on this in the remarks, but I'm still just trying to get my hands around the step down in C. S. C. A gross margins when I look at kind of second half 'twenty one to one <unk>.
22, I think they came down about 250 basis points sequentially.
And can you just provide a little bit more color of I guess, how much of this was one time.
What were the one day, they immerse exactly and then I guess how much of this is just like how sticky are supply chain inflation type stuff that you'd have to work through it.
It's a 100% one timers, okay, and we got hit with about $4 million of one timers part of it as cleanup.
There was.
A number of things one in the system as cold cough business came roaring back.
We had a bunch of customer claims, which we're working through and reversing right now so it may not only be one time, we may actually recover a fair amount of it but there was about $7 million of claims that are automatically kicked out when you when we agree on.
To fill a certain level of orders and we don't they take deductions.
And then and their boundaries that guide it but it automatically happens in their computer systems and ours and we have to manually go back and challenge those which where we're doing so we went from I'm going to give you. Just an example, if the forecast was for 100 I mean, it's obviously different than that FERC called GARP.
All of a sudden about the first week of January it shot up to 10 times that we were able to fill two or three times that but not a remaining seven times and there was then automatically kicked into the system. These claims then.
And it wasn't like I thought it was worth about $7 million that that number will come down.
Millions if not completely go away versus the past. So that's that's one piece of it another piece of it. Unfortunately is as part of one timers, even though we were short of cone cost inventory. This year from a year almost two years ago of inventory that you've made for the the.
Wednesday, one season back in 2000.
'twenty right for the inventories for that and with no cough cold season, we had a little bit of cleanup.
Of write offs that that needed to take place for that.
When your Crane, Russia came along we made a number of product donations and charitable donations that were one offs that we believed was the right thing to do those are just and there was I think.
Ray can help me, but I believe it was five.
Five or $6 million royalty rate catch up.
On one of our suppliers that.
That the accruals just needed to be adjusted none of that.
That's a couple of hundred point basically.
I am telling you that the gross margin, let's say SBA absent those one timers was exactly what it was in the fourth quarter and I'm actually feeling very optimistic about gross margin. This year to our our plans I know you guys had offended.
A higher level, but we actually hit our plan. Despite a couple of hundred gross margin points of one timers.
Brian hit our internal despite currency working against us despite.
New wave of cost increases that we offset with with pricing in most of our remedial actions like 90% of them are are still to come like pricing and things like that which we can talk about.
So it sounds like based on the answer I know that.
You laid out the second half margins for a nice step up just to think about just just sequentially for two Q should we be thinking about kind of two Q, let's just stick on the Americas business, but you know in the pre H R. A kind of more in line with what we're seeing for the second half of 'twenty, one or is it just kind of like 25.
And a half you know 25 level wherever we're currently kind of like a good proxy for two Q I want make sure I'm kind of getting the if this is such a focus on that number just the the gating as we go through the next few quarters.
Yeah.
It's going to factor in but.
But let's go back.
What was the period you were trying are you sequentially, it's going to increase but that's that's what I'm trying to get my hands around yeah right like it basically I think we were like 27 and a half second half of 'twenty. One is that like a reasonable level to think about like to queue before HRA.
Well I think it will be around 24.
Well Youre talking.
Looking at consolidated you just give me a second to get there from that.
Yes.
Yeah, I think that's sort of thinking about it the right way.
It pre.
Yeah, well I'm actually I've Gotta go give me one more second.
Yeah, I think thats right, okay perfect.
You've got a problem.
Operation I'm kind of sticking my neck out here, but I think we're gonna recover almost all of the gross margin losses I'm looking at four to 500 gross margin points of recovery by the fourth quarter, Okay perfect.
Other topic I wanted to talk a little bit about HRA. It looks like it had a pretty very strong <unk> and I noticed you were playing on talking a bit more about this later this year about the Asia array growth targets, but if I just go back to I guess, the 2021 results and kind of bridging out to where you're thinking about for 'twenty three I think it assumes something.
Like a mid 20% annual growth rate can you just again, just remind us of the growth drivers that are enabling that type of step up in in an HRA growth for next few years. That's I know that's a question that came out quite a bit post the proxy and we're just love just a bit of a reminder of just you know kind of how we think about the drivers of HRA. These next kind of two years or so.
Uh huh.
Yeah.
Finally location, giving this.
This earnings call to you, Chris I'm actually in.
In Europe by Matt might be going back and forth on that HRA integration meetings with that HRA headquarters two days ago going through each general manager that leads all the hubs around the country.
But around the world actually Europe export U S.
Where theres, an incredible high level of confidence in them, saying. This is the best start the company has ever had that their people are traveling again et cetera. So.
The first thing you have this year.
Is the numbers that we published out in the 8-K, but those were Covid numbers compete is was hurt dramatically by by Covid like our cough cold business no one without traveling hiking needing plasters I mean.
They werent out wearing high heels going to work.
Those are all the drivers. So you have this ramp up besides the normal growth of them, adding countries converting on Ela, one they're continuing to just switch different countries around the world.
From.
Rx to OTC.
And in future years, you have the entire line they have their Hanna line, which is the everyday.
Uh huh.
Pill that is a birth control pill that is if you've been reading the articles around the controversy bro versus way Theres also been articles and politico about.
One of the best positioned companies being HRA, who has a solution with an everyday.
Over the counter pill that.
We hope to have in by 2023 will be a growth driver and.
Applications are going into additional countries around the world for that they are broadening the <unk>.
Usage of the brand have already extended.
Tremendously successful from just.
From wounds in heels to adding right now.
Fever blisters on there is just the whole way above ways to build that brand to build out the product portfolio.
Expanding into the United States is a a big priority and driver of growth.
I was just blown away by both our confidence in that team that capability the sophistication of the marketing and.
You know there.
They strongly believe in those numbers whats that all up add up to.
Thank you were talking about on a double digit topline growth continuing without any revenue synergies and you're talking about.
The 100 going to $150 million in.
And operating income next year or 2023 excuse me. So yeah, you Brad talked to you about operating income I've gone back and forth.
He was on the deal model, we were talking EBITDA in the European version of EBITDA, but we're converting it back into our operating income numbers.
No.
I mean right now it is.
It feels like the Sky's the limit and again, we raised the synergy number from 30 million euros, so the $40 million.
This is going to come back this will be the best acquisition I've ever done in my career.
Excellent I appreciate the color I'll jump back in queue. Thanks.
The next question comes from Elliot Wilbur with Raymond James. Please go ahead.
Thanks, Good morning, maybe.
Hey, Larry how are you.
Yes.
Thanks.
Maybe a high level question on macro trends in the U S store brand market seem relatively strong growth metrics, but I'm wondering what you may be seen in terms of.
Potential consumer trade down.
In the quarter over the last year, just how things have trended from a market share perspective in the categories in which you compete in and then more specifically on the nutrition business strong performance in the quarter, obviously, a lot of factors behind that but.
Just wondering if we could sort of maybe tease out the.
Incremental lift from some of the organic initiatives that you've talked about over the past couple of quarters versus the.
Versus the benefit from overall, our supply issues, resulting from from.
Some are some.
Development at one of your competitors.
Yeah well.
Let me do the.
Second one first because that's refinished and Ed.
It only the recall only happened in like last week of March. So it. It had we had a bigger week that one week.
Whether that was a few million dollars or it wasn't massive it is big in the second quarter. So it just it.
I could run double what we have we're running flat out.
As much as we can.
Will that be sticky, we hope parts of it are sticky given the the test.
And we don't know how long that that situation is going to be in place through.
It could be a while it could be a long while and we're looking at ways to potentially.
Increased capacity at the request of the FDA, we're doing whatever we can I will tell you part of it that will be sticky as is in the face of the cost increases and shortages.
Our customers were more than understanding that we needed to adjust the price of this product.
Price gouging or any of that but but.
It had been hard to do in the past few years, and we were able to do that so that's a positive so yeah I mean.
First quarter barely anything second quarter it'll be meaningful.
Turning to the first question, we haven't really seen much trade. It continue I believe that is going to be.
And I listed on one of the slides, that's an upside for Paragon, but the national brands have spent a lot of money in A&P to restart their businesses to restart their advertising.
They clearly had some new products out there ready to go and they've grown frankly, a little bit faster than.
The store brand and the <unk>.
Existing the year end.
First quarter. The good news is we dug in pretty hard to that and had our partner from a data source of information resources to do all the panel data in switching and none of it came from store brand. It was just increases in consumption among their existing consumer basis, but not a big trade down. So the you know the big numbers that you see.
And consumption for US is all been just category growth in all boats.
Rising not a lot of switching I will tell you, they're taking more pricing than we are.
We work hard as we can with our partners. They work they've been beautiful they understand what the situation is now.
Boy I think we had.
$125 million of pricing on our consolidated <unk>.
P&L for this year and you know for us that's a lot and oh by the way.
I think about 10% or a little more than 10% of that was in.
The first quarter so.
There is well over a $100 million still to come on agreed upon pricing, but that's still only about 3%, 2% to 3% I think it was 2% in the first quarter, where if you are looking at other consumer benchmark companies. The big guys that we're talking about volume up 10, 11 five firm pricing.
Five from volume, we were up eight from volume.
Two from pricing and I think that sets us up for even more future growth.
As the price gaps widen a little bit so.
We're working hard, but I think we've got all of the inflation, including a second wave because of the war implications on.
Energy prices other commodities.
And all of that is triggering a rise for us and another $45 million of banks like us.
Put cost, we carried and plus that $45 million of all being covered by about $125 million.
So no.
And some good strong volumes.
But I think we finished this year.
Double digit.
Constant currency basis top line near 20% on a constant currency.
Neutral basis for the bottom line margins growing again beautiful brands coming in with HRA I think it's going to feel a whole lot different than.
In the back half of the year, but I do think this was our low this quarter.
Okay. Just following up on that I think in the text with respect to CSC, a you mentioned that.
Roughly $34 million of cost headwinds hit the operating profit line.
Absorption issues in freight cost and and the like which all seem to be more transitory just wanted to confirm.
In fact, if you believe that pricing actions and procurement actions.
There are themselves would be sufficient to offset.
That drag in the second half of the year.
Yeah, I think it will be enough to offset the drag for the total year, but there.
There was a delay or lag.
We're not like a national brand, where I can go and take a price increase on Friday, and it's up on Monday, we have to negotiate those when the stores are being reset many of those price increases are just going into effect now many of them.
Went into effect late in the quarter or in the beginning of.
The second quarter, but somewhere in place, but you know call. It if.
If we had roughly 15 cents of material and freight inflation in the first quarter.
We probably offset 80% of that something like that in.
With pricing alone and then the rest got offset by by volume.
As we go forward youre going to offset all of it or even possibly.
Touch more and.
Listen the big the big unknown for US no one said it but we had a big currency impact on <unk>.
On the business.
And then I.
Wanted to just circle back to the.
Gross margin.
Issue and we've obviously touched on this many times over the past 12 months to 18 months, but.
Within.
In your prepared comments.
This morning.
You talk about.
Optimizing accelerate and referred to supply chain reinvention.
That sounds more like a face lift and a botox injection. So I'm just wondering if you can kind of give us maybe some early insight into terms of what you're thinking I mean is this an actual.
Alteration of the physical footprint here just more about just having.
Better processes and procedures.
In place and material planning.
Strategy, so that we don't kind of see these huge swings in in.
The inventory and just we've got better line of sight into production just trying to understand.
Exactly what youre kind of thinking at least at this early stage when you talk about the supply chain reinvention.
But let me also be very clear when I am talking about that.
I'm talking about accelerate I am not taught me anything about the 2023.
The 2022 forecast I do have some assumption in 2023.
So I would build it so can I. If you don't mind my answer to that I'd like to answer the question for you this year, because I want to hit it over there.
That is a very clear path to recovery without without that when you add.
The absence of the one timers in the first quarter sequentially, you're adding a couple of hundred basis points. When the absorption issues go away that we carried into the year in the second half you add 120 basis points.
Remove Mexico that was low gross margin and zero operating margin of $100 million of sales you add a certain.
Amount.
When you add <unk>.
70% gross margin HRA business Thats growing rapidly from a mix you add 200 gross.
Basis points, even if you don't get a single benefit of that.
So pricing. So those are the drivers between to get you back the 400 to 600 points and a growing portfolio with the topline growing double digits and the EPS growing.
Double digits, which is a pretty exciting place for us to be and Oh by the way without $3 billion worth of tax risk.
Okay now.
Optimizing accelerated.
Starting to tease you with the ideas that I think can be very exciting prepare ago going forward, we have done five divestitures eight acquisitions completely.
Reconfigured this company to be consumer self care you had the Omega.
Ah.
Acquisition that was done a number of years ago and the entire supply chain has never been optimized.
The answer is all of the above to what you said.
And it will be a five year project and we got we took out $100 million and people are complemented us on being pretty tough on the operating expense line, but the cost line. In this company is dramatically higher there are four three to four phases. There's a short term let's call. It a short term mid term.
And our longer term 12 to 18 months 18 to 36 months 36 months or anything that would involve.
Consolidating distribution centers and optimizing for the portfolio of products, we have going forward, that's further out and and I will share with you when we get to our Investor day, our ideas there the immediate ones, though are getting our service levels back up coming out of Covid and all the disruption.
<unk> chain disruption that has given us a number of those one timers that has resulted.
You know in SSO levels that over the course of the year and obsolete inventories from making it an and missed shipments of.
Probably $100 million of profit opportunity in that category alone.
The turret that I'm starting to tease that again, it's not in our numbers is a 100 million to $300 million opportunity. We have a lot of work to do on it its readers and it is going to be the culmination of three years of putting in.
Costing down to the SKU level being able to get demand data for our <unk> separate from the entire store brand industry to build better demand models.
But a lot of things change when you get your service levels up into the.
And of the nine days, including your ability to sell more distribution and leave less revenue on the table. So demand planning is.
As a Super example of that scheduling as a simple example of that product portfolio is a great example of that Elliot we did an analysis and.
<unk> had some help doing it but every time the national brand launches the big S. K U. We have 500 variations, we take the market because of years of history of apparel in the U S, saying, yes to every single variation.
The startling part of that is 80% of that is not consumer facing and it's just a customer wanting it a little different a little different a little different slows down breaks down our lines. So the ability for productivity increase volumes. Almost every single one of our alliance is at Max capacity running 24 hours, a day, which is one of our major sort.
The issue then.
So that's a huge opportunity eliminating probably.
I think I showed this a year ago, though but and we're working on it but 30% of the line probably represents 90% to 95% of the the contribution margin so upfront demand planning forecasting.
Getting those service levels are.
Our our portfolio reconfiguration of our our short to midterm goals, but there will be behind that opportunities for consolidation of distribution centers.
Yeah.
Plant shop floor metrics.
Et cetera. So.
Yes, we're excited we have turned ourselves into a consumer self care company now it's time to turn ourselves into a great one and I got to get the stern margin issue as you pointed out behind me. So everybody can get us excited about the businesses.
Yeah, absolutely two quick additional ones for you.
Given all the.
External issues that the company has faced.
Logistics side and input cost side that have hampered gross margins in the U S. I guess I find it surprising or.
Relatively impressive anyway that the CSI margins have held up substantially better we've really seen very little margin compression there how much of that is just supply.
Supply chain related with respect to that business versus the ability to just take <unk>.
Higher and more immediate pricing actions to offset whatever incremental cost you or you are seeing and then there's a closure.
Given that you now own HRA. The company has been working on a potential OTC switch.
A daily oral contraceptive in the U S market for for some time now just wondering if there are any action or regulatory updates that are.
On the clock for the next six to 12 months. Thanks Murray.
Okay, well on the second one and the biggest one.
The next step is the official filing right you go through all the questions and all of those circles.
With the FDA in the U S Melinda.
Yeah.
They are aware with the customer so I'll tell you the name it's called the hotel and the hotel is.
Should be filed here within the next few months so that would be the next big hurdle and then the clock starts.
Chicken.
But again I'd encourage you to read the political article from earlier this week.
Something thats country needs I mean, there are.
6 million abortions a year in the United States.
30% of women.
Cancer have difficulty getting access to birth control.
And this improves accessibility, which is what our company is all about and by the way won't be the only country that we are.
Applying <unk>.
Continue to apply for also for Ela wanted.
Number of countries.
We also have Nathan except we got done so.
There's a lot of great.
Great things coming <unk>, you answered your own question, Thats, primarily pricing, but I.
That's the.
That's the biggest answer.
I think in general I would say.
I'll give credit to them.
Spanned Anderson, who runs that group.
And team they've they've done a lot of the portfolio reconfiguration that I've talked about five years ago, there were 15000.
Skus and now our international business today, there's about 5000 spend would tell me there is still about 1002 Manny.
So there is still further opportunity, but that's helped drive gross margins.
As well.
No.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Murray Kessler for any closing remarks.
Yes.
Said earlier in the.
The call I'm over here in Europe for the first time in.
Two year over two years to sit in front of a room of our our sales force and two days ago. It was in Paris.
In front of the entire HR 18 men and I just can't share with you how excited I'm not Pal excited.
The people in our organization are about our future et cetera.
Bottom line, we said we would start growing this company double digits on earnings double digits. This year and this is the year to do it.
Spent a few years green.
Making it smaller and getting that cash and have reinvested it now and youll start to see those numbers show it very soon.
Unfortunate that we got hit with the.
The supply chain.
Uh huh.
The other freight costs and others, but those werent Perrigo. There shows you you know that.
Those were our gross margin hits are no worse than Conagra gross margin hits, Procter and gamble's growth core.
<unk> gross margin.
Yeah sure.
I mean, everybody Treehouses gross margin I mean, it just hit the entire consumer industry and I think if you look youll see that <unk>, probably wasn't as bad because our team has done an incredible job in and I think we will get it recovered with less pricing, which will then in an inflationary environment.
Then hopefully.
Benefit the company in an expedited trade down because the last time. This happened we gained about porch airplanes. When there was a meaningful inflation in a recessionary period of time and I think youre going to start seeing volume for those national brand slowdown and not see volume slow down for us but.
That's just my my prediction bottom line. We've made we've kept every single promise. We said we would make we made three years ago in order to reconfigure This company.
At.
To the point, where we believe it starts paying up and you take currency out of the situation where.
We're well above estimates and that'll turn around too I mean in my opinion, but we will see over time, but right now we plugged in.
A very aggressive.
Euro exchange rate.
That has an impact but.
<unk> organic growth continuing and growing for three years lots of effort on margins lots of great brands and switch potentials et cetera going forward and after that you've got.
The supply chain reinvention coming.
Hind it so.
I like where I sit right now and it's time for us.
To prove it we would've been proving it already but.
The World, we didn't expect a war, but we'll get through that too and I'll leave you with one final note.
A member of my Ukrainian Salesforce is that this sales meeting and she intends and I'm almost fell down and I'm like what are you doing here and she said well we need all the information we got we still think we can deliver 70% of the plan we're not backing off.
So the people that pair ago our fighters. Thank you for your interest in cargo.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.